Accord Is Expected On Plan for Sterling By Central Bankers

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WASHINGTON, Jan. 7—Central bankers of the United States and the other leading industrial countries are expected to reach agreement on Sunday and Monday in Basel, Switzerland, on a novel solution of the long‐standing problem of Britain's sterling balances, according to American and British officials.

The problem, which has cropped up from time to time over the entire 30‐year postwar period, is the holdings of pounds by foreign governments and central banks, now worth about $4 billion, that are inherently unstable and put downward pressure on the pound.

A final agreement is not a certainty, the officials cautioned, though they expressed optimism on the outlook. Details have been kept secret, but the package is known to be significantly different from the type of arrangement in the past, aimed at stabilizing the sterling balances, that has not really solved the problem.

When foreign countries sell some of their pounds—either because they need dollars or because they fear that the pound's exchange rate may fall—they make the pound's problem worse by exerting downward pressure on it in the foreign‐exchange markets. Britain can offset this pressure only by using some of its dollar reserves fur intervention in the markets.

Negotiations among top Treasury officials, as well as the heads of the central banks, have been proceeding quietly for about a month. Edwin H. Yeo, Under Secretary of the Treasury for Monetary Affairs, left without public announcement for Europe today, though normally Treasury officials do not attend the central bankers’ meetings in Basel held under the auspices of the Bank for International Settlements.

Whether Mr. Yeo will go to Basel was not disclosed. Arthur F. Burns, the chairman of the Federal Reserve Board, will be there.

While the American share of the package will apparently not require approval by Congress, the Administration is acutely conscious of the importance of achieving general acceptance of its merits by the key members of Congress involved, such as Representative Henry S. Reuss, the Wisconsin Democrat who is the chairman of the House Banking Committee.

“I believe that it is financially sound, and will be seen as such in Congress,” said one high official. “And I also think it provides a real solution to the British problem.”

Major Contributing Element

A sharp drop in the official sterling balances in 1976 was a mayor contributing element in the decline of the pound last year. By the same token, the reduction in the total outstanding has made the remaining problem more manageable and a solution less potentially costly to the other industrial countries in a position to help.

Holdings of pounds by private foreigners, worth some $5 billion, are not involved. They are not as volatile as official balances and are not regarded as a serious problem.

According to partial reports of the proposed package, it will not as in the past provide any exchange rate guarantee to the foreign official sterling holders. They may, however, be offered the opportunity to switch any liquid, short‐term sterling holdings in excess of normal working balances into a longer‐term security fixed against the dollar or a “basket” of leading currencies.

This security would presumably count as a fixed debt of Britain, with a scheduled repayment period. This is known as “funding” some of the balances.

The second reported part of the package provides some protection for Britain in case of a further running down of the official balances. The Bank for International Settlements may float a bond issue, backed by a line of credit from the United States Federal Reserve System and other foreign central banks. If Britain's official sterling balances fell below an agreed amount, Britain could call on the settlements bank to make up the difference—to replenish Britain's reserves—and then would have a debt to the bank.

While both parts of the package could lead to additional British debts, the operation would really amount to substitution of one kind of debt for another. This is because the sterling balances themselves are, in practice, a British debt.

An important factor motivating the United States and other countries such as West Germany to seek a solution to the sterling balance problem now is the strong prospect of an early large swing of the British balance of payments from deficit toward surplus. This is in good part because of the big contribution to the balance of payments that will soon be made by North Sea oil.

A version of this archives appears in print on January 8, 1977, on Page 1 of the New York edition with the headline: Accord Is Expected On Plan for Sterling By Central Bankers. Order Reprints|Today's Paper|Subscribe